Clouds loom over Brown’s budget

Gov. Jerry Brown points to a chart as he unveiled his proposed 2013-14 state budget that at the Capitol in Sacramento, Thursday, Jan. 10, 2013. . (AP Photo/Rich Pedroncelli)

/ AP

Gov. Jerry Brown points to a chart as he unveiled his proposed 2013-14 state budget that at the Capitol in Sacramento, Thursday, Jan. 10, 2013. . (AP Photo/Rich Pedroncelli)

Gov. Jerry Brown points to a chart as he unveiled his proposed 2013-14 state budget that at the Capitol in Sacramento, Thursday, Jan. 10, 2013. . (AP Photo/Rich Pedroncelli) (/ AP)

Gov. Jerry Brown’s proposed path toward fiscal solvency could be quickly driven off course by forces both within and outside his control.

Brown acknowledged as much when he unveiled his 2013-2014 spending plan last week.

“We’re talking about a balanced budget. We’re talking about living within our means. This is new. This is a breakthrough,” Brown said. “As we say that, that doesn’t mean we’re in the clear.”

There are a number of potential threats shadowing Brown’s bid to bring state revenues in line with spending. Congress and the courts will play a role. His fellow Democrats may press for more spending. And how well global and national economies hold up will affect the revenue stream.

Brown’s budget now goes to the Legislature, which this spring will start the task of setting its own priorities. But the big-ticket spending and related policy decisions will be put off until after the governor submits an update in May that will be grounded in more accurate revenue projections.

“That’s when the tough choices will be made,” said nonpartisan Legislative Analyst Mac Taylor.

Brown insists he will not hesitate to rein in new spending.

“I want to advance the progressive agenda,” Brown said, “but consistent with the amount of money people made available (by approving higher taxes in November) … I respect and embrace my role of saying ‘no.’”

Assemblyman Jeff Gorell R-Thousand Oaks, who specializes in budget issues, hopes Brown sticks to his word given the $97.7 billion general fund has just a $1 billion reserve.

“His budget spends just about every dollar that comes in,” Gorell said. “That’s always a dangerous place to be.”

The outcome will have repercussions for millions of Californians, from college students hoping tuition bills stay the same to businesses facing potential hikes in unemployment insurance premiums to the disabled needing in-home aides to stay independent.

Here is a look at a few of the budget wild cards that could reverse California’s gains:

CONGRESS

How the new Congress and president deal with the debt ceiling and potential spending cuts could have repercussions, particularly in a state so vested in the defense industry and with big bills for social services partially covered by federal dollars.

“If they ever do get religion and start balancing that budget we could be in deep trouble short-term,” Brown said.

The legislative analyst warns that the debt ceiling debate and uncertainty threaten to put the housing market back into a funk.

Moreover, the analyst specifically cited San Diego in warning of a fallout.

“Segments and regions of the economy with high concentrations of federally funded activity, such as the San Diego region with significantly military and federally funded research activities, could be negatively affected,” the analyst reported.

COURTS

Brown is no different from his predecessors in being told by the courts how to spend tax dollars. Case-in-point: a federal court order to spend millions more on prisons.

Brown has filed court papers contending the state has complied with costly court orders to ease overcrowding and improve medical care for prisoners.

That money, Brown said, could be put to better use by improving job training, drug counseling and education programs that would help “return inmates to society and stay there.”

He does not attach a figure to the savings.

Another example involves In-Home Supportive Services, or IHSS. Brown is once again trying to trim the hours, thus the cost, of IHSS aides for the elderly and disabled to avoid moving into more costly care homes. Advocates have thus far succeeded in challenging previous cuts in court. Brown maintains previous attempts to rollback hours by 20 percent starting Nov. 1, giving recipients the required 90-day notice from budget adoption. In doing so he appears confident of winning a case before the federal appellate court in the spring. His budget assumes $113 million in savings this year and $272 million thereafter.

“WALL OF DEBT”

Brown’s budget seeks to start paying off old bills, proposing to gradually lower what he calls the “wall of debt” to $4.3 billion in 2017-18. The state currently owes about $27.8 billion borrowed from schools and other special funds.

But Brown has drawn rebukes for not aggressively tackling the bigger — and growing — issue of how to cover retiree pensions and health care benefits. That “unfunded liability” is $181 billion projected over the next three decades when sweeping in all state workers, teachers and judges.

The legislative analyst reports that even well into 2016-17 the governor’s budget projections “would not have begun the process of addressing huge unfunded liabilities … As such, the state faces daunting budget choices even in a much-improved fiscal environment.”

AND WHEN TAX HIKES EXPIRE?

Brown’s budget is balanced thanks to voters who approved Proposition 30, the temporary hikes in the state sales tax and income taxes on the wealthy making $250,000 ($500,000 per couple).

Those taxes will raise about $6 billion initially, much of which will go to K-12 schools.

But the quarter-cent state sales tax increase will expire in four years, and the higher income tax rates will disappear in seven years.

“That’s a mini-fiscal cliff of our own,” said Gorell, the Republican assemblyman. “There is very little insight into how to prepare for the end of Propositon 30. That worries me.”

Ana Matosantos, Brown’s budget chief, has said that the state will be in a position to absorb the loss of higher tax revenues. That’s because by then most, if not all, of the debt to schools, special funds and other programs will have been paid off.

UNEMPLOYMENT INSURANCE RATES

The state is on the hook for about $10 billion in loans from the federal government to cover unemployment insurance costs that escalated during the Great Recession. The state is borrowing from another account to pay the interest, which further adds to the debt.

Brown defends extending benefits to the long-term unemployed. For one, that money is returned to the economy. “It keeps things from getting worse,” he said.

Brown’s labor chief, Marty Morgenstern, is expected to gather representatives from business and labor to address the shortfall.

The choices are distasteful, according to Allan Zaremberg, president of the California Chamber of Commerce.

To cut costs, the state can raise employer premiums, reduce benefits for workers or a combination of both. Once some progress is made in reducing debt to the federal government, then the state may be able to bond against the rest of the balance at low interest rates, Zaremberg said.

MISCELLANEOUS

Health: Brown is committed to President Barack Obama’s health care initiative, saying “it was historic, it was heroic.” But he neglected to add that it could be a budget buster as well, especially if the state does add thousands of newly eligible lower-income Californian’s to subsidized rolls. Costs are estimated as high as $1 billion by some analyses.

More bond debt: There will be mounting pressure to assume even more debt long-term. A push is underway for a new transportation bond, and a water bond remains on the 2014 ballot. Both would pile on interest payments.

Increased volatility: By counting on higher personal income taxes the state has exposed itself to even more budget volatility because those revenues tend to swing, especially capital gains. That could increase the chances of “boom and bust” cycles at a time stability is the watchword.

Hospital fees: Brown will attempt to renew a couple of ongoing hospital-related fees through the Legislature that, combined, reach $664 million. Failing that, the state would have a hole to fill for health care-related services.

Global economy: Various factors could put the brakes on a slow, but steady California recovery. Prices at the pump and the new payroll tax increase could depress consumer spending, thus tax revenues. Upheaval in Europe has been partially blamed for fueling the Great Recession in the U.S. so a repeat would have ramifications here.